A Win-Win for Gold Miners?

Frank Holmes, CEO of US Global Investors, discusses the outlook for gold and gold miners, highlighting some favorite stock positions, helped by US Global’s various metals and resource-related funds.

Steven Halpern: Our guest today is Frank Holmes, CEO of US Global Investors. How are you doing, Frank?

Frank Holmes: I am very well, thank you.

Steven Halpern: Well, thank you for joining us. You recently noted that, for the first time in several years, gold mining stocks are outpacing the yellow metal itself which you consider a win-win. Could you expand on that?

Frank Holmes: What I think the big thing, Steven, is that we’ve seen, by the end of December of 2013, where gold stocks fell for three years in a row. Now over 30 days of data, that’s only happened three times.

Mathematically, we were down what they call two standard deviations, which meant that we’re due for a substantial rally. That is just based on price and historical movement.

What we’ve seen, also, that’s important, that’s taken place this year is stocks far outperformed bullion because many CEOs have lost their jobs. Companies have restructured down, basically, to streamline their operations and focus on profitable reserves, profitable production, rather than growth for any sake.

Steven Halpern: Now you recognized that there are challenges in the gold mining sector, particularly, the specific price levels that need to be in be in place in order for these mining companies to be profitable.

Frank Holmes: Yes, they ran their costs up, because what we saw on—looking at data points—is that the cost of mining equipment, the cost of engineering to comply with all the environmental demands—and the environmental rule making—grew faster than the price of gold, so they had external factors that were driving up their cost structure faster than their revenue line.

Now you’re seeing this reverse, where they cut back on development, et cetera, and focused on only high-quality production and the companies that we really like are the ones that demonstrate on a fundamental basis.

Now on our Web site, we have a cube, we like to call it, and we have found that the three key factors of looking at gold stocks, or resource stocks, is growth in production, growth in reserves, and growth in cash flow.

And what we do on an individual name is compare that so, say to all the stocks that are in the HUI and the GDXJ and what is the average in that index.

We then take a look at the individual names, which have a catalyst, a management and a momentum that they’re increasing over the next 18 months their production faster than the index, their reserves faster than the index, and their cash flow potential will be faster than the index’s overall growth.

Steven Halpern: So, in terms of individual stocks, one company Comstock Mining (LODE) is a position that you hold in your Gold and Precious Metals Fund, could you tell us a little about that?

Frank Holmes: Well, it’s a US based mining operation that looks like it has the potential—and based on press releases and financials and feasibilities they’ve sent out—their production profile is faster than any gold index.

CIBC recently came out with a piece of research showing that they expect gold supply from mines to actually be falling for the first time over the next five years. This is a company that has a very constructive growth profile.

The other one, which we recently commented on, that’s in our portfolio is Klondex (KDX), and Klondex also has a very robust growth profile compared to any index and it has excellent sponsorship, like Franco Nevada (FNV), which is a royalty company.